Hana's bid for KEB marks a busy week for Korea Inc

Hana Financial agrees to pay $4.1 billion for Lone Star's stake in KEB, while interests are registered for Woori and Hyundai E&C's sale faces controversy.

It is a busy time for M&A bankers in Korea. The peninsula might seem to be on the verge of devastating conflict, but that hasn’t hindered a scramble for banking and corporate assets.

Hana Financial Group, the country’s fourth-largest financial company, said on Thursday that it will pay W4.7 trillion ($4.1 billion) for the 51.02% stake held by US buyout fund Lone Star.  

The purchase of KEB is set to make Hana Financial the country’s third-largest financial company in terms of total assets, behind Woori Finance Holdings and KB Financial Group and ahead of Shinhan Financial Group.

The purchase price translates into W14,250 a share, 16% above Wednesday’s close, which is equivalent to 1.12 times book value. Hana is trading at a price-to-book multiple of 0.75.

Hana Financial signed a sale and purchase agreement with Lone Star on Thursday in London, where chairman Kim Seung-yu met Lone Star’s founder John Grayken on neutral ground. Lone Star hired Credit Suisse to advise it on the divestment of its KEB shares about 18 months ago.

In addition, state-controlled Export-Import Bank of Korea (Kexim) owns 6.25% of KEB and has an option to sell its holding to the buyer who acquires a controlling stake -- at the same price as that offered to Lone Star.

According to a banker familiar with the deal, final approval by the Financial Services Commission (FSC) should be granted by mid-March.

In an attempt to reassure KEB employees, Hana said last week that the two banks will be run separately. It is not a “cost-cutting deal”, said the banker. Instead, it is “complementary”, combining Hana Financial’s consumer finance franchise with KEB’s institutional and trade finance business.

He dismissed suggestions that the Korean authorities were biased towards Hana and against ANZ buying the Lone Star holding. Although ANZ’s interest in KEB was widely publicised during the summer, Hana Financial was always weighing up its options, he added.

The Korean lender, as well as other domestic banks, such as Kookmin and Shinhan, have considered making a bid for KEB at various times in the past five years, and both Hana and Kookmin made failed bids four years ago. Separately, HSBC encountered several obstacles to its attempts to buy KEB, and finally gave up on its ambitions in 2008.

In deciding whether to make a renewed bid, Hana Financial also had to compare the relative attraction of making a bid for the government’s controlling stake in Woori Financial Group, which is also up for sale.

There has been much speculation about how Hana Financial intends to raise the cash needed to pay for the KEB acquisition. Kim insisted that there would be no dilution of shareholder value: US private equity firms have been touted as possible partners, but local analysts think a combination of bond funding and a dividend from the Hana bank unit is more likely. Kim said Hana will devise a funding plan in two to three months.

At the end of last week, Moody’s put Hana Bank’s A1 credit rating on review for a possible downgrade, citing the “huge financing burden of the acquisition on its creditworthiness”.

Separately, Woori Finance employees submitted a preliminary bid for the government's stake in the company on Friday. The government owns 57% of the company, worth about $5.8 billion, through state-run Korea Deposit Insurance Corp (KDIC), and Friday was the deadline for investors to register their interest in the asset. J.P. Morgan Chase, Samsung Securities and Daewoo Securities were hired in September to help KDIC sell its stake.

Until its bid for KEB, Hana Financial had been viewed as a likely buyer of the Woori stake. Now, domestic private equity firm Vogo Fund might also enter the fray, according to Korean media reports.

Two smaller lenders owned by Woori Finance -- Kyongnam Bank and Kwangju Bank -- might be sold separately. The FSC has said that it plans to draw up a short-list of bidders for Woori by the end of this year, and to name a preferred buyer in the first quarter of next year.

Local media reported on Friday that there were up to 11 bidders for Woori, including US and domestic private equity firms.

Meanwhile, a third possible Korean M&A transaction has run into difficulties.

The $4.8 billion sale of a 35% stake held by the government in Hyundai Engineering & Construction (Hyundai E&C) to Hyundai Group faces a delay due to concerns about the purchaser’s financing sources.

Hyundai Group trumped competitor Hyundai Motor earlier this month, but other Hyundai E&C shareholders have asked for more information about a W1.2 trillion loan from French investment bank Natixis. Hyundai Group has said that the loan is unsecured, but there is a suspicion that group shares have been offered up as collateral.

"It is highly questionable that a publicly-listed French investment bank would lend a highly-leveraged Korean shipping company W1.2 trillion with no collateral," said a banker watching the situation.

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